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In a one-two punch aimed at fostering fair competition and empowering workers, the Federal Trade Commission (“FTC”) issued a nationwide rule banning noncompete clauses and agreements (“Noncompetes”) for nearly all workers while the Department of Labor (“DOL”) expanded overtime protections to a portion of salaried workers. These new laws are set to go into effect later this year.

Background on Noncompetes

Noncompetes were already unenforceable in Virginia for low-wage workers. On January 16, 2024, the VA Department of Labor and Industry increased the threshold of low-wage status to those making less than $73,320 annually. Nationally, current Noncompetes affect nearly one in five American workers.

According to FTC Chair Lina M. Khan, noncompete clauses have long been a hindrance, suppressing wages, stifling creativity, and impeding economic dynamism. These agreements often force employees into undesirable situations, sometimes left to choose between potentially facing costly legal battles or remaining in unfulfilling jobs and poor working environments. The new FTC rule is intended to safeguard the fundamental freedom of employees to switch jobs, stimulate innovation, encourage new startups and business ventures, and bring fresh ideas to the market.

Predicted Economic Impacts

The FTC estimates that banning Noncompetes will lead to a 2.7% annual growth in new business formation, equating to over 8,500 additional startups each year. Moreover, workers stand to benefit from increased earnings, with the average worker expected to see a yearly income boost of $524. Additionally, healthcare costs could decrease by up to $194 billion over the next decade.

In terms of innovation, the FTC predicts a surge in patent filings, estimating an average increase of 17,000 to 29,000 new patents annually for the next decade. By fostering a more competitive landscape and encouraging entrepreneurship, the ban on Noncompetes promises to drive progress and spur economic vitality.

Entrepreneurs seeking to become first time business owners, whether solo or with a partner(s), should consult with a business attorney to ensure their formation, products and services, contracts, and activities comply with applicable laws, regulations, and other requirements.

Impacts on Employers

Under the new rule, set to go into effect September 4, 2024, existing Noncompetes will become unenforceable for the majority of workers with the exception of senior executives which represent less than 0.75% of the workforce. Employers will be prohibited from entering into new Noncompetes, even for senior executives. Instead, they will need to provide notice to affected employees that existing Noncompetes will not be enforced.

Employers still have alternatives to Noncompetes, such as trade secret laws and non-disclosure agreements (NDAs), which protect proprietary information without restricting employee mobility. Additionally, employers can attract and retain talent by offering competitive wages and fostering positive working environments. By encouraging fair competition and merit-based retention strategies, businesses can attract and retain top talent while fostering a culture of innovation and growth.

Business owners should consult with an attorney on when and how to notify workers of nonenforcement, updating employment contracts and templates to remove the soon-illegal noncompete language, and strengthen protections around trade secrets and NDAs. 

Expansion of Overtime Protections

In tandem with the FTC, the DOL has unveiled an overhaul of overtime protections, aimed at extending fair compensation to millions of salaried workers. This will be a two-step phase: starting July 1, 2024, most salaried workers making less than $844 per week will be eligible for overtime pay, and on January 1, 2025, the weekly threshold will increase to $1,128.

Looking Ahead

While the FTC’s final rule marks a significant step forward, it faces legal challenges from business lobby groups who have already filed a lawsuit seeking to overturn it in court. These challenges underscore the broader implications of the rule and its potential to reshape the legal landscape surrounding employment contracts.

If they hold up in court, these reforms represent a victory for workers, businesses, and innovation alike, upholding the rights and dignity of workers while fostering a more diverse and resilient economy. As the landscape of labor practices continues to evolve, policymakers and business owners alike must remain vigilant in ensuring that regulations, both in theory and in practice, reflect the principles of fairness, equity, and opportunity for all.

This material is for informational purposes only. It is not intended as legal advice and does not create an attorney-client relationship between its readers and Dunlap Law. Consult an attorney before taking action on issues outlined here. This is attorney ADVERTISING MATERIAL.

References:

https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

https://doli.virginia.gov/2024/01/16/notice-of-the-average-weekly-wage-for-2024/

https://blog.dol.gov/2024/04/23/what-the-new-overtime-rule-means-for-workers

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